(As a side note, Wikipedia's toy example of "STV in a party system" considers a case where three parties field candidates for 5 seats and receive 48%, 45%, and 7% of the vote, resulting in those parties respectively winning 2, 2, and 1 seats. This is about as bad in terms of proportionality as any other system [Party A has 686% of Party C's votes and 200% of the representation; Party B has merely 643% and 200% of the representation], which isn't a surprise; 5 seats don't allow for proportionality unless you're lucky enough to see a 63-37 split in the electorate. But if party-based proportionality is a concern, the correct answer is fairly obvious - the three parties should receive 2, 2, and 0 seats, with one seat going unfilled. It is interesting to me that no one ever seems to contemplate this as a possibility.)
I don't think that the approval voting scenario you suggest is good though. If I want to elect five candidates, I want 5 candidates that represent the diversity of the population. But it seems to me that your suggested method will elect 5 candidates of the largest voting bloc, not at all what we want.
The example is very explicit that votes are cast for parties and all of the benefit of receiving a vote goes to the party for which it is cast. As such, the model is only coherent if there is no such thing as voting for a candidate.
But really, what exactly the original example intended to convey is a pointless pedantic argument I'm not getting into.
The crucial point is that you absolutely can have multi-member proportional districts where you vote for specific candidates. So to someone who advocated for a such multi-member districts, the contention that you have to give up voting for individual candidates simply isn't true.